P/E ratio

Definition

P/E ratio, or Price-to-Earnings ratio, is a valuation metric that compares a company's current share price to its per-share earnings. It helps investors determine the market value of a stock relative to the company's earnings.

5 Must Know Facts For Your Next Test

1. The P/E ratio is calculated by dividing the market value per share by the earnings per share (EPS).
2. A high P/E ratio may indicate that a stock is overvalued, or that investors expect high growth rates in the future.
3. A low P/E ratio may suggest that a stock is undervalued or facing difficulties.
4. The P/E ratio varies widely among industries; it’s important to compare companies within the same sector.
5. Sustainability reporting can impact a company’s P/E ratio by influencing investor perception and potentially affecting earnings.

Review Questions

• How do you calculate the P/E ratio?
• What might a high P/E ratio signify about a company's stock?
• Why is it important to compare P/E ratios within the same industry?

Related terms

Earnings Per Share (EPS): Net income divided by the number of outstanding shares.

Market Value Per Share: The current trading price of one share of stock.

Valuation Metrics: Financial metrics used to assess the value of a company, including P/E ratio, price-to-book ratio, and dividend yield.